Property investor Olly Newland says hawkish new Reserve Bank Governor Graeme Wheeler hasn't changed his view that interest rates will remain low for some time still and house prices will double over the next few years.

In a Double Shot interview with interest.co.nz Newland also said the Labour Party's idea of building 100,000 houses over 10 years at an average cost of NZ$100,000 to tackle housing affordability issues was a nice catch phrase but wouldn't happen, and Auckland property owners were 'asleep at the wheel" over the Auckland Council's proposed rail loop.

Of Wheeler, who replaced Alan Bollard in September and has adopted a more hawkish, anti-inflation tone hinting the next move in the Official Cash Rate could be up, Newland isn't worried.

Newland says he has never seen interest rates so low, and has suggested they'll remain at or near the current levels for many years to come, and could even fall further. This, he says, provides a "huge wage rise" for the mortgage belt and working classes, plus property investors and first home buyers. And in his previous video interview with interest.co.nz Newland advised people to "borrow until it hurts" to get onto the property ladder.

Now, despite Wheeler being on the helm at the Reserve Bank, Newland's unmoved.

"No, my views haven't changed at all. I think there's a lot of politicking going on there. The Reserve Bank, whatever they'd like to say, are not as separate from the Government as you might think," says Newland.

"I'd imagine they have a cup of tea and have a chat with the politicians. I think it's the politicians that'll be driving any changes in the (housing) market. I think if the market is left alone, it will continue strengthening and eventually plateau off in the future and I don't think the Governor of the Reserve Bank, with all due respect, has much control over it."

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He argues the further back you look into history the further forward you can look.

"And I've been around now over half a century and they (house prices) have been doubling every 10 years or so and there's no reason why they shouldn't carry on doing it," Newland says.

"The question you've got to ask is how much does it cost to buy a second hand house as compared to a new one? Now a new house is still much dearer to buy than the one next door, so to speak. There's GST which is 15%, so a NZ$500,000 house new has NZ$75,000 of tax in it and a second hand house two doors down doesn't. So when second hand houses catch up with new houses, then things may change. But at the moment they're no way near it."

Labour's housing affordability policy might work if the houses were built at Eketahuna

"It sounds good but I think it's impossible. If they can push the price down to that (NZ$300,000 average) then somebody else is paying for it. I just don't think it's possible, unless of course you build the houses at the back of Eketahuna or something. But if you're trying to build them anywhere near a major centre like Auckland or Wellington, I think it'll be impossible because there's not only the house you've got to build, You've got to provide the infrastructure - roads, schools, power, sewage, working places, shops, offices. You can't just put them in the middle of the country. You might as well put out 100,000 caravans it'd be cheaper and quicker to do it," said Newland.

"It may never happen but the moment the Council under Auckland Transport are putting their name on all sorts of properties they want to buy up," says Newland. "The owners will wake up one day and find they effectively no longer own that property, they can't sell to anyone, they're locked in there."

"This happened before in the 60s. The Council came out and put down where road widening was going to go, much of which didn't happen. It destroyed the values left, right and centre, that were near where the proposed road widening was going to go."

"Unless they (the Council) buy them up soon, it's not going to be right. It's supposed to be done by negotiation but at the end of the day they can take them under the Public Works Act. At the moment this has no effect because there's a lot of apathy around. But as soon as this starts to get more serious then I think we'll see fireworks," Newland adds.

Capital Gains Tax 'a dead duck'

In the video he also talks about the potential impact on the property market of a Capital Gains Tax, which Newland says appeals to those who have no idea how the property market works and as a feasible option is "a dead duck." He suggests a simpler Stamp Duty, as Australia has, might ultimately be brought in, although notes he's not in favour of this either.

He also criticises proposals for the strengthening of earthquake prone buildings, saying they're not practical. Standards proposed by the Ministry of Business, Innovation and Employment suggest it could cost up to NZ$12 billion over 15 years to upgrade all the country's earthquake-prone buildings.

Meanwhile, Newland says the rippling out of house price increases from central Auckland into previously unfashionable suburbs is a very common phenomenon, and something he has seen many times before.

"The boom starts in the centre of town where everyone wants to be, and then if that's too expensive it moves out like the ripples in a pond. And then it'll move out to the towns near by. This ripple, if it continues, will end up going through Huntly and Mercer and Cambridge and Hamilton and going north and so forth. This is just the way the system works," Newland says.

"I think it's important that people get on the property ladder as soon as possible, even if it hurts, and if necessary buy in a suburb just beyond the ripple at the moment."

That said, he adds: "Auckland is becoming too dear."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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31 Comments

Who thought the RBNZ was separate from govt....silly as thinking the govt is separate from the banking bosses.
We are entering the second period of stupid govt...the socialists sat on their &^%$# while bubble number one grew and now this mob in the Beehive are looking the other way....bubble two on the way.

Affordable Housing Construction is a possibilty, the land conversion from baren to residential with full services, water,power,sewer and telco coupled with Council contributions and GST are what blow the budget out.

I'm about to start a 24 lot residential development, 24 1000m2 flat quarter acre lots, located in the Carterton, Wairarapa. 85 km North of Wellington.

This specific develoment has been 2 years in the regulatory process, Resource Consent, the last 2 months has been Council checking off the Services Plans and Construction Drawings.

The construction period is 4 months, so 24 months+ in the regulatory process and 4 months to build.
GST on each lot will be approx $17,000, Council contributions, $9,000 per lot.
Over the years i have met many Developers or Groups that want to be Developers, most have thrown that idea away due to massive delays that financially pillage the project.

Construction Costs of the Houses are compatible over the whole Country, eg a Jennian,A1,Keith Hay,Platinum in Wellington is within % same as Auckland and same in Toupo and Dunedin etc.

Its the Council Building permits and consents that alter drastically through out the country.

Personally i dont see any major action from the current Govt, The Social Housing Unit want to Build more Social Rental Housing with the $104 Million over the next 3 years.

If there are no Affordable New Houses constructed then this Govt better get ready to Build a sea of Social Rental Housing as the masses can no longer afford to house themselves into home ownership.

The important factors are you cant build 20,000 houses overnight its not like manufacturing light bulbs, there is a tremendous amount of lag per house, 4/5 months.

Enough research, enough reports stop kicking the can down the road, seed some building of Affordable Houisng or gety off the pot.

New Zealanders have aspirations they are go getter and at present 1000 per week are going to Australia to get a house.

Yah, indeed, MCNZ, 'tis the Carry as wot does yer in....I seem to have blugged on aboot this at some length....the sad fact is that until Councils get hit with IRD-like penalties, and are forced to account for the time value of money, then nought will change....they are in fact Economically Clueless and thus do great damage.

I do applaud you for staying the course: many developers either head for the top end of the market, where the buyers are shall we say not price-constrained, or pull their heads back inside the shell and do nothing. Neither of which helps the starter-kit market. But an all-too-human response to impossible odds.

Note from this that one changes relative to the other, but, as is usually the case in the real world, both change. None the less the principal still aplies in that if one increase or decreases by more than the other, from the point of equilibrium, then there will be a price change.

When supply and demand are on the increase simultaneously, this is refered to as economic growth.
As we go through this growth cycle, the supply and demand may move out of equalibrium. When this happens, the Reserve bank steps in and adjusts demand, using the OCR.
If supply is growing faster than demand, then prices drop and so the OCR will drop.
If demand is growing faster than supply, prices will rise and so the OCR will rise.

In reality, the Reserve bank is tinkering with economic growth, when they put interest rates up they are slowing down growth, and vice versa.

When economic growth peaks, that is, when the bubble bursts, demand collapses and causes a recession. Supply on the other hand can only fall slowly, as shops and warehouses built up stock during the boom years, and now have to run down their stock which takes time.

After the bubble bursts the Reserve bank is helpless to do anything. Stimulus only works, if it puts money into peoples pockets, so they can pay off debt. Until their debt is paid, their spending ability is greatly diminished, and the economy remains sluggish.

There are two important points that should be noted, and they are:

1) In a closed economy, as we have had in the past, supply is restricted by the ability of the local economy to generate locally produced goods and services, and so demand also has a limit. Using the OCR on such an economy is very effective.
When that economy is then opened up to all outsiders, supply, and the variety of the supply, is boosted significantly and so a corresponding boost in demand is necessary. If supply has no limits then demand also has no limits.
Under this open economy, supply goes way beyond the ability of the local economy to pay from local demand, and so alternatives have to be found. That increased demand has to come from either exports or debt.

I have been arguing lately, that when an economy is open to all suppliers everywhere (globally), and when an economy is in the growth stage, demand will always lag supply. When that happens prices remain either stable or very slightly suppressed and so no need for an OCR increase (unless you wish to slow growth). My further reasoning is that in this growth stage, business are keen to increase turnover and market share, which means they will keep well stocked to meet that potential demand. That further reinforces my belief that demand will lag supply. Also, demand can only grow at the rate people are able and willing to borrow and spend. And that to also further reinforces my belief that demand will lag supply. When demand lags supply the OCR dosn't go up.

2) When an open (global, unlimited supply) economy is in the growth stage there are only three possiblilities available to a Reserve bank.

a) allow the economy to grow to peak and then collapse (boom and bust)
b) push up interest rates before peak to crash the economy early. That is, before debt gets too out of control, so the subsequent downturn will be minor.
c) Hold the economy at a sustainable level.

The reserve bank governor knows that there is little else he can do. As for his "other tools" that is just tinkering, when a whole new direction is required.

As far as c) is concerned "holding the economy at a sustainable level" that requires a whole new subject, as it requires a whole new direction, as mentioned above.
So Olly is right - "the reserve bank is stuffed"

Many people posting on this site completely ignore these basic economic principals when the housing market is discussed. The Auckland housing market is currently in the "If demand increases and supply remains unchanged, a shortage altogether, thus leads to a higher equilibrium price" The reserve bank changing interest rates would effect demand, but there hands are tied because it would also increase the value of the NZD and put more pressure on our exporters. As you state it would also negatively effect economic growth and considering most parts of the country (outside of Auckland) are struggling this is also unacceptable. The most important reason they wont increase interest rates is because it will hurt the pockets of thier voters and hit the value of thier asset(s) and elections are never far away.

So an increase in Auckland house prices is certainly the lesser of two evils, sure first home buyers will need to lower thier expectations to get on the market, but everyone else gets economic growth and an increase in thier net worth. As for affordable housing in Auckland, there are literally hundreds of flats, apartments and terrace houses in Auckland for under $350k, first home buyers just need to change thier expectations.

"No, my views haven't changed at all. I think there's a lot of politicking going on there. The Reserve Bank, whatever they'd like to say, are not as separate from the Government as you might think," says Newland.

Exactly. Houses are worth what can be borrowed against them, what banks will lend. This is an issue for legistlators.

Housing is a cash cow for banks and obviously higher nominal prices mean ever more percentage of income as interest.....for your whole life.

"Newland says he has never seen interest rates so low, and has suggested they'll remain at or near the current levels for many years to come, and could even fall further. This, he says, provides a "huge wage rise" for the mortgage belt and working classes, plus property investors and first home buyers"

Bullchips......It provides a means to extract more wealth as a percentage of the economy in interest.

Lets have a real "huge wage rise" nationally and see how that plays out.

First of all there is nothing new about the rock in the pond principal or ripple effect.
In the early eighties wealthy Koreans displaced many Epsom dwellers offering ridiculous money to gain residences, leaving displaced locals to buy near to driving up prices in surrounding areas with cash in pocket to boot.
Is the RBNZ helpless or just simply irrelivant to what is an internal shock to the economy, or shock dose if you like...? The larger part of demand for houses in affluent areas is coming from foreign investment and ...is ..largely Chinese, regartdless of the bollocks you'll hear to the contrary, as I said previously I have a senior contact at Barfoots and have no reason to doubt the information supplied.
Auckland skews the figures as far as median price goes Nationaly horrifically, but is the drive for demand in Auckland localy driven .?..in areas of affordability post displacement or first home buyers yes, but again where did the benchmark begin...well with the rock in the pond or shockdose Foreign capital.
Is the current Administration indifferent to the bubble situation in Auckland or is it complicit in allowing it to run it course...?
Complicit I'd say ,while State house properties earmarked for sale will benifit drastically in both affluent i.e.( Tamaki /Orakei) and demand areas (i.e.)( Roskill) during this bubble period .
The sacrificial lamb here is the average New Zealander, first home buyer, being disenfranchised in the interests of Foreign Capital injection, on that alone why would the RBNZ take any action to discourage the current set of outcomes.I mean if they could , which they can't for reasons of being hamstrung.
What sickens me here is the Local property industry laying claim to the boom as if it is a naturaly occuring event or a normal part of long term cycle, oh yes we know every ten years Blah blah blah sitting down talking bollocks... and continualy feuling a fear buying market...as in get in or miss out altogether.
It's ok to pay a lot for something if that's what you really want or desire , it's not ok to be solicited or duped into owning something that ends up owning you, just because you were afraid you might miss out.....as it will be of little consolation to you paying your mortgage with your pension years.
For those heavily leveraged to generate wealth portfolios, I'd say good luck to you as there is always risk attached to high return investment, it certainly appears as if the bounce has gone the way of the P.I. over the medium term, and knowing when to get out or build an exit strategy should be of prime importance even in the current climate.
Somebody said to me of Wheedler...I remember him at school, he was insignificant then, he's insignificant now.
Ollie...for heavens sake man ,dress like you sell...the car dealer thing is long gone.
John Boy ....well you just suck altogether.
Be mindfull of captured monies at all times.

Christov asks: Is the current administration indifferent to the bubble situation in Auckland or is it complicit in allowing it to run it course .. ?

That question immediately raises another question .. "run its course" .. implies it has an end .. a finishing line .. somewhere down the line .. where is the end? .. as you point out it is a "residency" driven issue .. then and now .. it's not a monetary policy issue .. it's an immigration issue .. while residency has value or appeal, what price do you put on that goal, how do you price it? .. what is that appeal? .. how do you assess where the end will be .. will it end? .. what if it doesnt end? .. What if it increases? .. Who is in control?

Iconoclast...The same thing that happened to the Korean community will, with a change in fortunes of currency and the like ,happen to the Mainland Chinese entrepreneur, here to capitalise on the milk market back to China, the entrepeneur here to service the growing Chinese community, the property investor here to capitalise on Chinese demand for affluent property and launder some cash at the same time.
Geography....it's what always happens to growth spurts in N.Z., geography catches up in the downturn. In an energy driven world , geography is a major factor.
So run it's course ..? yes I think so.....that is not to say we won't continue to increase our population through immigration, just to say the type of wealthy immigrant we( the administration) look to attract will find it presents less opportunities on scale.
Of course this will be more noticable when the U.S. economy begins any sort of meaninful recovery not based on print and poke but production.

First time post(er) but have been reading for many years...
Can someone with more of a background in economics than me explain why the following actions / consequences would not happen:
1) Reserve Bank prints a boatload of money and buys into the US S&P 500 or some such index fund for the purpose of long term funding of NZ super and other needs;
2) The hot money people and other holders of NZ$ head for the exits, depressing the value of the NZ$;
3) Exports / employment improve;
4) Tax take improves;
3) The reserve bank then has more latitude to raise interest rates (when necessary) without the exchagne rate going even higher.

It would seem to me that NZ could do this and I don't see significant downsides (unless you are a NZ$ trader), since NZ would simply be catching up with every other economy around the world that is printing money - except that the country might get something tangible in the end.

Interesting to note that the RB is Independent in only so far as its what it does, the consequences of its independent actions fall on the people of New Zealand. This is such a strange situation that we then pretend is normal. Why should it be that the decisions are independent of us yet the consequences of those decisions fall squarely on us? It appears a little lobsided.

"And I've been around now over half a century and they (house prices) have been doubling every 10 years or so and there's no reason why they shouldn't carry on doing it,"
Bollocks.
Overly simplistic. Extrapolating the past to the future is fundamentally flawed given the demographic and economic headwinds that exist over coming years. We are starting from a base of very low interest rates, high employment participation by women and a demographic cycle where the baby boomers are ageing. The booms of previous years were facilitated by growing household incomes facilitated by greater female employment participation, lowering interest rates, and a demographic bulge in home buying created by the baby boomers.
Olly Newland can spruik all he likes but he lacks justification for his claim. If median house prices are 50% higher than today in 10 years time I'd be very surprised, let alone 100% (ie double)

not sure what your point is, other than to point out the obvious that ppty in Akld is overpriced. The whole "ppty doubles every 7-10 years" mantra is bollocks. In the long term most studies show its just above inflation. The last 30-40 years have been exceptional because:
1) there were long periods of very high inflation where even 10% rises a year would have been a real loss. So growth pre 2000 was not that great relative to inflation. Hence ppty was still broadly affordable up to that point.
2) the last 10-12 years HAS been exceptional relative to inflation as globally cheap and easy credit enabled us to hock ourselves up to the eyeballs in debt, which incidentally caused the GFC, and which process we are repeating on the back of even cheaper and easier debt thanks to over easy monetary conditions here and overseas (which hopefully the RBNZ is now having a quick think over ... but i dont hold out ANY hope of sensible policies from them or govt).
matt's right, property can not outgrow incomes exponentially for ever. We have a govt who hopes however it can go for another year or 2 so they can get re elected by a populace too stupid to know they are being fleeced. The can has been kicked down the road and we will all be the worse for it when reality hits. So in short, big future gains in the short term are possible but certainly not guaranteed. Long term gains in the magnitude of last decade will simply not occur (short of a completely unforseeable event).

Oh yes: "This time it's different"
In addition - if you buy the right asset and give it a little massage, or buy something with a twist - there is no reason to wait seven years for it to double!
Cheers,
SK

"I don't think the Governor of the Reserve Bank, with all due respect, has much control over it."

RUBBISH! They have all the power to deal to it but..........choose/chose not too. Put the OCR for example up to 6% and watch what the banks do..........and then watch the house prices..........and the NZD.......
IT has an effect IF used at the right time AT the right level. For example IF the OCR had been put up to 8% in 2003............the bubble would never have gotten traction....
TIMING is everything. That and a TRULY independent RBNZ from bank influences INCLUDING the US FED

Now there's a good idea.
Put interest rates up and see the NZ dollar go to $ 1.10 / US $1.00 and unemployment to exceed 30 pc.
Interest rates hit 22 pc in the 1980's and house prices still went up 100 pc within 18 months.
Justice should apply for a job with the RBNZ .
His talents are going to waste.

And.................house/property prices? Which way will they go IF what I say is applied?. I notice you left out that one. The 1980's was also a time when the NZD was not floating. The OTHER effects will be short term, as the wealth tranfers will take care of that ;-)
We also don't actually need to use the USD as a reserve or gauge either IF we chose not too
The "too big too fail" days are numbered BD. We

If interest rates were hiked suddenly by 50 pc or more then landscape would be littered with homeless people who will be forced to abandon their homes.
Then, as prices collapse, the mob will rule.
Be careful what you wish for.

When delivering a speech entitled the Global Deleveraging: The Right Track at the Hong Kong Economic Summit 2013, Chan said that excessive leveraging, or over-borrowing, in major industrialized countries was the root cause of both the global financial crisis and the more recent sovereign debt crisis plaguing Europe.

Chan said quantitative easing is not a panacea, but it is the exact opposite of deleveraging. In the past three years, quantitative easing had limited stimulating effect on the real economy. "In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem."

There is a possibility that quantitative easing produces the desired results, which is a very desirable scenario as global economy will return to its normal growth path, he noted.

However, there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient.

As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound, if inflationary pressure builds up alongside asset price increases, central banks may consider exiting the market and raise interest rates, the authority's head said.

Chan said he was certain that since the outlook for macro economic and financial environment is very uncertain, it is highly possible that large fund inflows and outflows as well as sharp fluctuations in the financial markets will continue to be seen.

"We should all take precautionary measures and get to the bottom of the problem, learn from others' experiences and avoid overstretching ourselves. Otherwise, we may find ourselves being trapped in the debt abyss with no way out," he said.

Norman Chan is correct up to a point. He believes there is still a good ending and that they are in control.
The end game is either massive inflation (much disbelieve now) or massive deflation.
Either way this has to end. Massive QE has failed to lift the economy of any countries involved (US, EU, UK,Japan, etc) but the monetary base has expanded tremendously, except that they are kept in reserves with Central Banks.

Sooner or later this has to be reversed, and either the money will flow out into the world to cause massive inflation or the economy (addicted to cheap credit) contracts even further and cause a massive slum.
Central Bankers are growing increasingly desperate, from QE Unlimited (until unemployment decreases) to the latest from the next Governor of Bank of England "targetting nominal GDP irregardless of stimulus amount". All are desperate to avoid the necessary adjustment from the last three decades of overspending and falling productivity.
Most Central Bankers and Politicians thinks they can control the process of reversal of QE, but this is just wishful thinking. Human behavior and market moves is unpredictable, history has proven so.

The current property bubble is just a slight manifestation of the side effect of QE. This bubble is all over the world, except where you need it (in QE countries). This shows the toxic side effect of QE as well as its ineffectiveness. When it ends, there will be even greater pain than the last collapse in GFC1.

The NZ Property market prices will continue upwards until the time comes when the US federal reserve raises interest rates. This will be either because the USA has no choice due to debt or if employment in the USA drops to 6.5% . At the moment we are looking at 2015. More and more central banks are diversing away from US dollar notes as they relise that the US dollar long term is going to collapse. A trigger could be a bond market collapse when rates go up. In 2013 both Europe and the USA will be back in recession, in 2014 the worst of the Chinese crisis will unfold and Greece will be out of Europe at the back end of 2013 or in 2014. Much pain is going to be felt in the next few years which is why interest rates will stay low during the next couple of years that could still cause property prices in NZ to rise even though major trading partners are struggling. My view is that the inflation case is likely to be a stumbling block in the property market when interest rates eventually start rising and this could be in 2-3 years time when Australian banks get downgraded as there external debt becomes to big with slowing growth returns from the Chinese industrial mining that Australia has done well in the past years. Funding costs will go up. For the next few years like Olly has said the property market may give the best returns and then you need to time your exit or buy in areas of NZ that have not had overheating to protect yourself.

Good synopsis.
The 64 thousand dollar question. When and if rates rise.
The fed can go for a long time monetizing treasury debt, regardless of who wants their paper. Wall st will buy no matter what.
The USD reserve standard is still in place, backed up by Uncle Sam's navy.
I truly believe gold will be remonetized over time and become some sort of stabilizer of currencies and interest rates.
In the meantime interest rates are below inflation......this is stealth debt default.....other side of the coin is savings default. Central banks will get addicted to this.
Cheers